Trickle-Down Economics: Four Reasons Why It Just Doesn't Work

By Mehrun Etebari July 17, 2003

We've all heard the claims that cutting tax rates for the richest Americans will improve the standard of living for the working class. Supposedly, top-bracket tax breaks will result in more jobs being created, higher wages for the average worker, and an overall upturn in our economy. It's at the heart of the infamous trickle-down theory.

The past 40 years have seen a gradual decrease in the top bracket's income tax rate, from 91% in 1963 to 35% in 2003. It went as low as 28% in 1988 and 1989 due to legislation passed under Reagan, the trickle-down theory's most famous adherent. The Clinton years saw the top bracket hold steady at a higher rate of 39.6%, but under the younger Bush's tax-cut policies, the rich are once again paying less. The drastic change in tax policy that has taken place since the early 1960s gives us a great opportunity to study and evaluate the claims that lower taxes for the rich translate to more wealth for the average American.

We can compare changes in the top tax rate with the real GDP growth rate (a measure of the growth of the entire U.S. economy), and three measures of how life is for the average working American: annual median income growth, annual average hourly wage growth, and job creation. If cuts for the rich were really the magic elixir for the economy and the middle class that the Republican consensus claims it is, we would see an increase in the four indicators whenever the tax rate dropped. However, this is not the case. Such a trend occurs sometimes, but the opposite happens at other times!

Let's look one by one at comparisons of key economic indicators to the top tax rate.

1. Cutting the top tax rate does not lead to economic growth.

This graph shows the fluctuations of the real GDP growth rate over the period, indicating the performance of the U.S. economy as a whole. It is true that growth increased drastically after the 1982 tax cut, reaching as high as 7.3% in 1984. However, as the Reagan-Bush, Sr. administrations went on and taxes for the rich were slashed even further, growth fell to negative levels during 1991, at the heart of the last recession. And, two of the three years with the highest growth were during the 1950s, when the top tax rate was 91%. Overall, there seems to be no close relationship between the top tax rate and the GDP growth rate, and statistical analysis backs this up: the correlation coefficient between the two variables is 0.03, meaning that there is essentially no connection. (If tax cuts were strongly related to GDP growth, we would see a coefficient close to -1.) So much for upper-class tax cuts boosting the economy; now it's on to median income growth.

2. Cutting the top tax rate does not lead to income growth.

Again, we see inconclusive evidence for the power of tax cuts. We do see small peaks in median income growth, a good measure of how the average American household is doing, after top-bracket tax cuts in the mid-1960s and early 1980s, but we also actually see income decreases after the tax cuts of the late 1980s, and strong growth after the tax increase of 1993. It is true that in the year with the worst median income decrease (3.3% in 1974), the top tax rate was 70%. However, it was also 70% in the year with the highest median income growth (4.7% in 1972)! Once again, the lack of connection between the two measures is backed up by a correlation coefficient near zero: 0.06, to be exact. And yes, yet again, the coefficient is positive, indicating that income has gone up slightly (though negligibly) more in years with higher taxes. Two strikes. How about hourly wages?

3. Cutting the top tax rate does not lead to wage growth.

Not surprisingly, we have mixed results yet again! Growth in average hourly wages did increase during the 1980s following the first Reagan tax cuts, albeit two years after the cuts took effect. But, just like GDP growth and median income growth, hourly wages decreased following the late 1980s tax cuts, and spiked upwards after the 1993 tax increase.

Furthermore, wages grew at a level of at least 1%, and usually much more, all throughout the period when the top income tax rate was 91%. In fact, it isn't until 1972 that we see a wage growth rate of less than 1%. However, if we look at the 19 years of the study period when the top tax rate was 50% or less, we see that 8 of the years saw an increase in wages of less than 1%. Thus, it seems that hourly wages grew more when taxes were higher - indeed, the correlation coefficient is 0.34, indicating a mild positive relationship between higher taxes for the rich and higher hourly wages. This finding flies in the face of the conservative theory. As if that's not enough, now let's see about what President Bush claimed would be the biggest result of tax cuts - job creation.

4. Cutting the top tax rate does not lead to job creation.

Here, we see the change in the unemployment rate laid against the top tax rate from 1954 to 2002. Thus, negative values signify a decrease in unemployment -- in essence, job creation. Once again, while the top tax rate trends downward over the period, the annual change in unemployment doesn't seem to trend at all! Although the largest increase (2.9%) did occur in 1975, when the top marginal tax rate was 70%, three of the four largest decreases in unemployment occurred in years when the top rate was 91%. The mixed results do not bode well for those who see tax cuts for the richest as a sparkplug to incite job growth. The correlation coefficient between the variables here is 0.11 -- meaning that there have been slightly more jobs created in years with lower top tax rates, but this pattern is negligible -- nowhere near strong enough to signify a relationship.

So, can you tell what our conclusion is yet?

Overall, data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans will improve the economic standing of the lower and middle classes or the nation as a whole. To be sure, the economic indicators examined in this report are dependent on a variety of factors, not just tax policy. However, what this study does show is that any attempt to stimulate economic growth by cutting taxes for the rich will do nothing -- it hasn't worked over the past 50 years, so why would it work in the future? To put it simply and bluntly, Bush's top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth -- unless, of course, if you're talking about the size of the deficit.

Create an account

One way to prevent yourself from suffering is to just become rich yourself. Surely, relying on the rich to “trickle down” the wealth they attain from tax breaks may work for some time; however, to think that just because the top pay fewer taxes means that everybody will get wage increases does not make much sense (why pay people more to do the exact same job?). The tax cuts will allow the rich to invest more money, so that they are able to make more money, and in the sense they make more jobs or their employees. However, does that lead to an increase in pay for employees (I do not know). The other solution is to just tax everyone 50% no matter what, and that will allow people to have health insurance, education, and a bunch of other “free stuff”. Regardless of what country you live in and the situation you are in, there are one of three options: (1) deal with it and make it work for your benefit, (2) move to a country where there are laws you enjoy, or (3) change the system where you are in. As for me, I do not wish to be a lawmaker yet, so I prefer to work the system to my advantage and use it to benefit others.

trickle down economics has been around since reghan was president in never worked then and now look at the damage its done to the middle class that’s what it was designed to do and now the us is in a pile of trouble

So it does work. Your article Acually shows it does. Notice one thing. By the time taxes are increased incomes are up. You even stated that. Also notice incomes decreased by the next cut. Hmmm. The economy is slowly effected by both. Fact. It takes a minimum of to years to see the effect which your evidence clearly shows eitherway. By that time impatience grows and they go the opposite way as history shows. How about leave things alone long enough for it to stabilize. Rich people live unstable markets it drives profots.

Chris McReynolds. In your beautifully well written counter-arguments you never provided any information where trickle-down leads to economic growth, income growth, wage growth, or job creations. There is proof that says otherwise.

Chris McReynolds commented
2016-11-04 08:43:27 -0400

Sergio DuBois commented 6 days ago:
“It just works!” they say. Just listen to this (grossly oversimplified) explanation. But what about the data? What about REALITY? If you don’t understand what a “correlation coefficient” measures, of course the graphs will make no sense to you. It means that all these things that are supposed to be improved by a top tax rate cut – were not. Period. Science seems to be a sore point for conservatives, until they get on the next airplane, and they are glad the slide rule pocket protector types have figured it all out. The theory does not pan out in fact. The grossly oversimplified explanation of how logical it is – amounts to nothing in the real world that can be measured or observed."

Arrogant hypocrite, cutting taxes for “the rich” (anyone that has additional funds to invest thanks to the tax relief) does tend to lead, in the current “global” environment, to having investors send some of their money around the world where they get the best returns. Rather than wondering how to make our nation more competitive in lagging sectors, you instead offer sophisty about your “graphs” to justify economic fascism as a matter of “common sense” or empiracism when you’re not telling the whole story. What about Social Justice? Why won’t you allow other economies to catch up? You prefer to tax “the rich” so that you can engage in a little Social Justice and or Keneysian demogoguery.

Investment flows out when we Americans can not compete economically in some project or enterprise. Not because the government needs to nationalize everything. Because that is where your “scientific” models take us.

“Science seems to be a sore point for conservatives, until they get on the next airplane, and they are glad the slide rule pocket protector types have figured it all out.”

Get a life.

Chris McReynolds commented
2016-11-04 01:27:59 -0400

“Corporations don’t hire more people because they have more money they hire more people when there is a demand for them.”

That’s true. They seek maximum return on their capital. So where do they put it? You’re implying that this “extra money” is “lost” because it’s not taken by the government. This is false. This is a classic example from “broken window” fallacies.

“If you have a demand for lets say 100 of something and say realistically to make them in time 1 person can make 5, a business is not going to hire more than 20 workers just because it has more money left over after overhead costs and taxes. "

This is a straw man argument. The question is whether (assuming we set aside moral questions regarding who has “rights” to take these profits) the private sector or the government will make best use of those “excess” funds for the sake of maximum GDP, again, assuming that is your goal.

“Demand creates jobs, new technology’s and infrastructure.”

Real demand creates useful jobs. “Busywork” wastes resources. Demand does not create infrastructure. And not all “infrastructure” investments lead to real increases in “wealth.” Dig a ditch and then fill it just keeps people busy and maybe improves their health but it doesn’t improve “the economy.” Unless you use mendaciously framed statistics to measure “currency” without counting all of the costs.

“Here’s where trickle down hurts the economy. The average earner of 250k or greater per year spends just 15-35% of their yearly wages. The average middle and lower class family spends 100-110% of their annual income. When money is mobile the economy is good and it is more mobile in the hands of the middle and lower class than the wealthy.”

That makes no sense. If A earns X wages in a free market, your interventions might help you model something better. That’s financial modeling that rarely stands up to real world scrutiny. But by taxing A and creating busywork for B or C you are only playing nutshell games with money. These are just sophomoric models used to hide income redistribution schemes. You have to show how redistribution is itself “valuable” to GDP. One can show models that support “safety net” policies can do that, but not progressive taxes that central planners use to imagine that they can lead consumerism and maximize economic output.

Corporations don’t hire more people because they have more money they hire more people when there is a demand for them. If you have a demand for lets say 100 of something and say realistically to make them in time 1 person can make 5, a business is not going to hire more than 20 workers just because it has more money left over after overhead costs and taxes. Demand creates jobs, new technology’s and infrastructure. Here’s where trickle down hurts the economy. The average earner of 250k or greater per year spends just 15-35% of their yearly wages. The average middle and lower class family spends 100-110% of their annual income. When money is mobile the economy is good and it is more mobile in the hands of the middle and lower class than the wealthy.

Trickle down does not work. Most recently we had eight years of trickle down with George Jr and we went into a deep recession only other effect was an increase in the wealth gap and a further propping up of the stock market. Trickle up (Keynesian) makes more sense – everyone $100k on down does not pay income tax – they will consume more which will increase the demand on goods and services which will create jobs and generate higher revenue for businesses/wealthy. At the level of cheap money in the market and the wealthy business class having access to it – they do not need a tax break to create a new division or subsidiary etc. If the shareholders at the firm get a tax break they are not going to take that “extra” money and hire a couple new lawyers – unless they need them – then they will hire them anyway.

“It just works!” they say. Just listen to this (grossly oversimplified) explanation. But what about the data? What about REALITY? If you don’t understand what a “correlation coefficient” measures, of course the graphs will make no sense to you. It means that all these things that are supposed to be improved by a top tax rate cut – were not. Period. Science seems to be a sore point for conservatives, until they get on the next airplane, and they are glad the slide rule pocket protector types have figured it all out. The theory does not pan out in fact. The grossly oversimplified explanation of how logical it is – amounts to nothing in the real world that can be measured or observed.

Chris McReynolds commented
2016-10-19 00:35:21 -0400

“Trickle down economics” is not “tax cuts for the rich.” It’s reducing the burden on productivity. It’s about waking up to the fact that yes you can kill the golden goose when you get too greedy.

And do you know who invented term “supply-side economics”? Jude Thaddeus Wanniski, https://en.wikipedia.org/wiki/Jude_Wanniski, a journalist, friend of Louis Farrakhan and adviser to Reagan, he was there when Arthur Laffer drew his famous curve. Reagan and the others must have been laughing like hyenas knowing that they would be able to fool people into believing in trickle-down. However many times you prove it wrong, people will still believe this rubbish.

That’s why the world’s in the state it’s in, corporate brainwashing for decades. The golden period of capitalism was in the deacdes after WW2 when governments around the world spent on infrastructure to rebuild and created social safety nets and health care systems to support ordinary people who had lost those who had sacrificed their lives for their country. That resulted in a period of extraordinary growth through Keynesian economics and high taxation on companies and the rich. The more those taxes have been reduced the more the state has to be reduced and the more money is concentrated into fewer hands. It’s not complicated at all.

Wealth redistribution is an essential check on capitalism, the market doesn’t adjust itself, it needs constant intervention. To say otherwise is just propaganda. Companies need constant welfare from the state or else why do you think they spend so much on spreading their message, buying politicians, etc. Because it’s not a natural state of affairs, it needs constant interference and people’s minds to sustain it.

Martin Zagrzejewski commented
2016-10-11 12:03:51 -0400

This article is incredibly misleading and I encourage all to actually look into how supply side economics actually works. Liberals labeled it “Trickle down economics” as to politicize the theory and attack it. Yes, it actually does work. Without getting too detailed, let me ask you a simple question. Who creates jobs? Corporations and high earners. When you tax corporations and high earners more, they do what they have always done. They leave this country or adapt their business model to make more money. That’s how economics works. Now let’s go on the other hand and say we tax the 1% of wealth in this country at 90% or higher as some of these crazy people think will actually work. One, you have given a strong incentive for every corporation and high income individual to leave this country as soon as possible. Now those $15/hr jobs you thought you would have belong in China or elsewhere. And no, you have no way to force them to stay just because they’re an American company. So where does that leave you? Oh you could nationlize every company in the United States but then we’re no better than the Soviet Union that your parents fought against for 50 years. Understand now?

Donald Heiland Jr. commented
2016-10-07 04:30:50 -0400

Trickle down economics is as tax cut for all. So if everyone gets a tax cut,it trickles to everyone! SO IT DOESWORK! NEXT!

This is interesting, and I believe it to be true. After all, how effective can cutting taxes on an incredibly small percentage of us really be? People say “the top 1%” really, it’s smaller than that. Additionally, when tax rates were at 90% in the fifties, the percentage of individuals actually qualifying to pay that amount were virtually non-existent (that and look at the timing, we were experiencing a serious post war boom as one of the only industrialized nations that didn’t have to rebuild after WWII). What this article willingly dismisses is the actual key tenant to trickle down economics. Business tax. If I am paying 65 cents on every dollar to the government to conduct business, I would simply leave and move my headquarters to, let’s say, Ireland where they have a 12.5% tax rate. By the way, this is happening big time (i.e Google, Microsoft, Facebook, Apple etc…). There is a reason why industry starts in this country or Ireland before it travels to the rest of the EU, and that is simply the tax code. Ours is currently better. Socialism works and is really fun and cool for a decade or two, but it collapses as it is doing in Europe (how’s Greece, Portugal, and Spain doing these days? And have you heard of Deutsch Bank?) Even the Scandinavian nations are turning back to the right. Please, I implore all of you, do your own research and don’t get caught up in statistics which are notorious for ignoring the real data points when there is a political platform to protect.

Kevin Cushing commented
2016-09-28 11:38:13 -0400

Cutting taxes for the rich leads to more stock speculation and other such things- hardly more jobs. And it widens the income gap.

Bob Petersen commented
2016-09-13 19:06:57 -0400

The two things that drive wages up for 99% of us is Union membership and the Minimum Wage. The 1% and their minions insure these will both be suppressed. It’s time we demanded the rest of the New Deal be enacted in full and Americans allowed to earn a Living Wage and not just a minimum wage.

Joe Upton about redistribution of wealth the way I hear it the stock market is rigged in favor of the wealthy+ the wealthy have lots of $ to spare for for investing, most families have little to invest so returns are much smaller & accumulate slower then the wealthy, + wealthy have investing secrets that have only come to light in the last ? yrs. = big gains for them.
So maybe some redistribution is a good thing? if it’s being taken from the wealthy then who gets it? the small invester

I reminded a guy in a reply on another site about trickle down economics how it didn’t work & he replied it didn’t work because some democrat I forgot who screwed with it, that guy was no drought a big Reagan fan, I didn’t believe him.

This article is full of wrong information. But the big problem with it is that it assumes that rich people don’t have rights and poor people do have rights. The truth is that everyone has rights but governments don’t always secure those rights. And what are those rights? They include the right to engage in economic exchanges free from coercion from the government. When government steps in and starts picking winners and losers, starts redistributing wealth, that is the opposite of securing rights.

does the argument really go that “cutting top rate” will boost the economy? that sounds like a strawman to me. there’s a difference between “cutting the top tax rate” on the rich (which obviously will not impact the economy), and reducing total taxes paid by businesses, which is what makes all the difference. if i didnt have to give away 50% of my business’ income every year, i could afford to hire more people – 2x more of them.

It may seem too simple, but the rich get richer and the poor get poorer because they both keep doing the same thing over and over. When Congress voted the luxury tax in, several large yacht companies closed or laid a majority of workers off to survive due to reduced sales of yachts to the rich. Now who paid the price for that tax?

arco man commented
2016-08-09 00:40:24 -0400

Trumps economic plan falls in line with what the grand old party wants, tax cuts that benefit the rich (the people that dont need it) in hopes it trickles down, we have seen trickledown economics before, and statics show it does not work. 4 reasons
1. Cutting the top tax rate does not lead to economic growth. 2. Cutting the top tax rate does not lead to income growth. 3. Cutting the top tax rate does not lead to wage growth. 4. Cutting the top tax rate does not lead to job creation.

folks have been working harder and not seeing a raise, corporations have been sticking the profits in their pockets his plan will continue that trend. That trickle that is coming down is not what you think, hold your nose! And you will need a bath once they are finished!

Someone posted this on another site. “Here is how trickledown economics really works…
- Boss, I really like your car.
- Thanks. Keep working really hard and I will get an even better one next year”

Wait a minute! Isn’t he supposed to be the difference maker, not like the rest? Suppose to come in and shake things up? His plan is business as usual and then some, more money for the rich (who do not need it) bump the middle and lower! The top 1% of the country makes 350k and above, so why even focus cuts for them, they are already economically in a very stable place!

arco man commented
2016-08-09 00:38:55 -0400

@joe Phelps lol read the conclusion plus there is an explanation after each graph. smh. Here is the first line from the conclusion, I cant say it any better myself! “Overall, data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans will improve the economic standing of the lower and middle classes or the nation as a whole”